Greek bond sales a litmus test as Athens looks to leave bailout era

LONDON (Reuters) - Greece’s economy is growing, its credit ratings are on the up, the government has returned to bond markets and hopes to leave the 86 billion euros (£75.2 billion) bailout that kept it from default.

But it will still be a challenge to lure long-term investors to an imminent sale of seven-year bonds.

Greece returned to the bond markets last year for the first time since 2014. The 3 billion euros sale of five-year bonds was deemed a success with a yield of 4.625 percent.

That sale was heavily supported by hedge funds. It would be a sign of confidence if Greece can attract a higher proportion of conservative funds, in it for the longer haul, at the new debt issue which could come as early as next week.

Two big bond investors told Reuters they were unlikely to take part in upcoming Greek bond sales because they were still concerned about the sustainability of Greece’s debt. Another said he would approach it with caution.

Greece has had three bailouts in the last decade and a debt-to-gross domestic product(GDP) ratio approaching 200 percent, the highest in the 28 member European Union.

“Greece is a controversial story because on one hand, the economic picture is better and reforms asked for by the European Commission were voted through, whereas on the other hand, the total amount of debt is still there,” said Patrick Barbe, head of European bonds at BNP Paribas Asset Management.

His European sovereign and aggregate bond team has no exposure to Greece as its low credit rating puts the country below the threshold that would allow the firm to invest there.

He said he was cautious about buying upcoming Greek bond issues.

“HEADWIND”

S&P last month lifted Greece’s rating for the first time in two years but at ‘B,’ Greece remains five notches below the “investment grade” threshold that would open it up to a much wider pool of investors.

Its rating also puts Greece on par with Nigeria, Rwanda, Cape Verde and a notch below serial defaulter Argentina.

Other numbers are pointing in the right direction. Economic growth is running at 1.3 percent on an annual basis and data on Thursday showed factory activity expanding at decade-highs and a record pace of job creation.

Seamus Mac Gorain, senior fixed income portfolio manager at JPMorgan Asset Management, which manages assets of $1.6 trillion, said although the strong growth environment means more confidence in high-yield borrowers such as Greece, debt levels would be a “headwind” for a move to lower borrowing costs.

Greece’s relatively small and illiquid bond market also makes it hard for big investors to trade. The vast majority of its outstanding 316 billion-euro debt is held by official lenders, with only about 40 billion euros trading in the market.

That is a fraction of the 2 trillion euros or so in debt that trades in markets such as Germany and France.

TEMPTING

For other investors, Greece has offered exciting returns and the upcoming auction will present them with a new opportunity, particularly given the generally bullish mood towards “risk assets”, including emerging markets and high-yield debt.

Those who stuck with Greece reaped returns of more than 40 percent in U.S. dollar terms last year - the best in Europe - as two and five-year Greek bond yields fell, touching record lows GR2YT=RR GR5YT=RR recently.